Sydney Industrial Rent Rises as Availability Becomes Scarce

Rents for industrial premises in Sydney and are back on the rise amid strong demand from transport and technology tenants and limited availability of stock, especially in South Sydney.

Following a relatively flat period in 2013 and 2014, rents for super prime and prime warehouse property throughout Sydney rose by 2.0 per cent and 1.3 per cent respectively in the first quarter of 2015, albeit with rents for secondary stock remaining flat.

Around the city, a warehouse property market which is becoming increasingly favourable to landlords is being driven by a combination of robust demand and declining stock availability.

On the demand side, strong interest is coming from tenants in the transport and logistics sector, who are beefing up space in order to take advantage not only of reasonably strong general economic conditions but also growing volumes of merchandise trade going through the Port of Botany, which has created demand for warehouse facilities in the vicinity of the Port to accommodate storage for imported and exported merchandise prior to or immediately following shipping.

Technology outfits, too, are beefing up their space requirements. Earlier this year, for example, medical technology provider Stryker signed up for an additional 1,027 square metres of space at its premises in St Leonards.

Demand is particularly strong in South Sydney, where space with proximity to the port, airport and CBD is in high demand.

That situation is being exacerbated by a rapid withdrawal of supply – again predominately in the South – as owners of warehouse space take advantage of strong residential market conditions to sell to developers wishing to undertake conversions for residential use.

In 2013/14, for example, no fewer than 71 commercial tenants in Sydney’s South were displaced in order to make way for residential developments, real-estate outfit Knight Frank said.

These conversions keep on coming. Advan Properties is hoping to gain approval for a residential conversion after forking out $4,751 per square metre for 947 square metres of space at 133-141 Botany Road. Last month, meanwhile, owner occupier NSW Leather hived off its 1,423 square metre warehouse and showroom space at 707 Elizabeth Street in Waterloo, choosing to relocate to alternative premises further south and take advantage of strong selling conditions for property which can be converted into residential uses.

All this is exacerbating underlying fears of a long-term shortage of available industrial land. In a 10-year report on the outlook for industrial property in December last year, BIS Shrapnel warned the Sydney market had only two to two-and-a-half years’ worth of ready to build industrial land beyond what was already committed for construction as tight-financing conditions in the post-GFC environment saw developers pare back on investment and run down their land stocks.

Most immediate shortages were occurring in the vicinity of the M4/M7 interchange, BIS Shrapnel said, which has been a desirable location for transport/distribution facilities since the opening of the M7 in 2005.

Added to that, the immediate outlook for new stock coming out onto the market is not strong. In calendar 2015, CBRE reckons 419 square metres of new stock will hit the overall market – the lowest level on record since 2011 – with Sydney’s outer west and south to receive particularly low volumes compared with historic averages.

All this is leading to what is likely to be an increasingly tight leasing market, particularly in the south.

Transaction Activity Also Strong

Meanwhile, capital markets are also strong, not only amid the underlying demand conditions for leasing but also as easing finance conditions underpin strong levels of capital flows from both foreign and domestic purchases.

In the year to March, almost $2.7 billion worth of industrial land took place throughout Sydney in 115 significant transactions – almost twice the value that has taken place in any other year over the past 10 years.

Going forward, commentators expect momentum to continue. Gavin Bishop, national director of industrial at Colliers International, for example, said 2015 will see strong demand from real-estate investment trusts and major developers, who are looking for increasingly scarce 20 hectare sites. Bishop named Botany/Banksmeadow., Milperra, Padstow, Silverwater, Lidcombe, Homebush and Eastern Creek as key areas where strong capital growth is likely.

The bottom line of all this is that unlike much of the rest of the country – with Adelaide facing the closure of automotive plants and Perth suffering from the easing of the resource boom – current market conditions within Sydney look set to remain favourable to landlords and in both the leasing market and the capital market for some time.